The 2020 Pandemic: Economic Repercussions and Policy Responses

The 2020 Pandemic: Economic Repercussions and Policy Responses,” published in the Review of Financial Economics, is undoubtedly worth a read for both policymakers and practitioners alike. Central to Orlowski’s argument is that the pandemic has created severe wounds to the U.S. labor force that will not abate, while correctly noting it has not damaged the physical capital stock. He remarks that while some industries such as healthcare and IT will benefit from the seismic shifts created by COVID-19, many more will experience a structural realignment and have lower long-term employment levels. These industries include travel, retail, manufacturing, and recreation, among others.

Looking back at the sudden shock and economic stoppage that COVID-19 caused, Orlowski views this as a unique case of a “Minsky moment.” Here Orlowski defines a Minsky moment as a “sudden decline of optimism among financial investors that entails a market correction and economic recession.” Indeed, CNBC’s headline after the close of the market on March 31, 2020, read: “Stock market live Tuesday: Dow drops 410 points, down 23% in 2020, Worst first quarter ever.”

While Orlowski provides plenty of sound analysis and ideas to ponder, what stands out most to me is what he calls the “identification gap” – the difference between actual cases and reported cases. Interestingly, he notes the challenges of treating a healthcare crisis such as a pandemic with economic policy and why testing, vaccine development/distribution, and other measures to slow the pathogen’s spread should take precedence over rushing stimulus dollars. To quote Orlowski: “They shall not begin with an indiscriminate, hasty adoption of fiscal or monetary stimulus measures that could become misguided.” As a father with three teenagers, I also worry about future generations becoming saddled with trillions in new government debt because of some early initiatives”. According to Orlowski, this lack of confidence in the actual number of COVID-19 cases in the U.S. is the problem. He concludes that if the identification gap narrows, policymakers and economic agents would have “better information about the scope of the pandemic and anticipated social and economic consequences,” enabling them to develop better policy responses.

If we are to right-track the economy and provide investors and businesses with the confidence they need to move forward; a crucial step will be to close the identification gap. May wisdom be our guide!

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Michael D. Herley